by George Marron

Created on: May 26, 2008

Stock spits are usually seen as a good thing that a company can do for its investors. Frankly, it increases the number of shares that a shareholder owns in a public company. A shareholder with two hundred shares of stock priced at one hundred dollars per share will compute to twenty thousand dollars (200 x $100). If the company splits its stock two to one, then that person will own four hundred shares of stock now, but the price per share will decrease to fifty dollars. The shareholder will still have the same amount of investment that he had before the stock split. However, by having more shares of stock, the shareholder could earn more earnings in their return for their investment in the future. It is a gift to the shareholders.

A reverse stock split could occur as well. It is a reduction in the number of shares while the price of the stock increases. The ratio is reversed as compared to stock splits. It can be a one to two or a one to three ratio. However a reverse stock split does not occur often. Reverse stock splits are a means to reduce the number of shareholders that a company has. This tactic would hurt brand loyalty. Companies would not want to make their shareholders angry at them by buying them out and leaving them with no stocks in hand.

Another action that a company can make is a reverse/forward stock split. It is a reverse split followed immediately by a forward split. For example, a company executes a one for one hundred reverse split where each one hundred shares that a shareholder owns will be converted to one share of the new stock. Then, it will be converted into the same form as their original shares through a one hundred to one forward split. What has changed?

In this example, those investors who held less than one hundred shares of the company's stock will be left out in the cold. They will be bought out. Those who only hold less than one hundred shares will no longer be able to stay invested with that company when the immediate forward stock split occurs. One reason why companies would act this way is to save money. By losing their smaller shareholders, companies would not have to use resources on them. Money used to send out mailings and customer service needs can be slashed. Nevertheless, the company's public image can be damaged. It could show that they do not care about the small investor and only care about the big honchos and money bags.

Companies need to show that they care about their investors. A separate way that was not discussed in this article is by paying dividends which is a portion of the company's profits being paid out to the shareholder. It's a good idea to look for them.

Learn more about this author, George Marron.
Click here to send this author comments or questions.